EDITOR: | July 28th, 2015

Forget the market gloom — the trend favours technology (and technology metals)

| July 28, 2015 | No Comments
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Palm-readingTwo weeks ago I posted an extract on the subject of the difference between cycles and trends. It is necessary to return to the subject, lest we start to lose sight of the situation with all the market mayhem and fear occurring right now.

But here’s the good news: the cycle looks pretty terrible at present (all commodity cycles do at some stage) but the trend (for rare earths and technology metals) looks pretty good. Hold that latter thought: you will need its comfort in the coming months.

The cycle looks pretty dreadful. On Monday at the London Metal Exchange copper hit a new six-year low at $5,173/tonne, a long way down from the $10,000 it commanded in early 2011. Nickel closed at $10,982/tonne, its $50,000 high now a dimming memory, while lead (a short time ago the base metals star) sagged to $1,680/tonne. This, of course, was after a session on the Shanghai Stock Exchange which saw an 8.5% hit for the day, 1,700 companies falling by the maximum 10% movement allowed on any one day with only 78 companies rising in price. Gold is holding its own, but the anaylsts are circling, ABN Amro predicting a fall next year to $800/oz while Deutsche Bank sees $750/oz (which, apart from everything else, would put out of business practically any Western gold miner – then it would be interesting to watch a world starved of new gold supply).

So, yes, things look pretty grim.

But let us go back to David Jacks. In 2013 Jacks, an economics professor at Simon Fraser University in Vancouver and a research fellow at the Massachusetts-based National Bureau of Economic Research, stressed the world of difference between cycles and trends, noting that for mineral commodities there had across the 20th century been a gradual increase in prices but with many cycles along the way. He saw the mid-2000s commodity boom as largely a recovery from the prices nadir which occurred around the year 2000 — the first decade of this century being part of a cycle, and which has now certainly passed its peak. By contrast, there has been a long-run trend across the index of the thirty-two commodities studied by Jacks for an uninterrupted rise since 1940. That’s the trend.

So let’s put July 2015 into perspective.

The cycle is a worry. But if you read the latest predictions by international consultancy McKinsey & Co, then the trend is far more reassuring.

Back in 2007 McKinsey made some predictions about energy. Now the analysts have revisited them. One very interesting factor was batteries and the implications of curbing greenhouse emissions. As Scott Nyquist writes, “at that time, we did not even include electric vehicles; we expected that the big improvements would come from internal combustion engines”. But innovation in consumer devices (smartphones, tablets and laptops) has changed the game for large format batteries. In 2007, large format lithium-ion storage cost about $900 per kilowatt-hour. Today the cost is about $380, and it’s on track to drop below $200 within five years, according to McKinsey.

Here’s the trend: as the analysts say, in all directions (solar, wind, batteries, shale gas and energy efficiency), they got the direction right, but not the speed. Photovoltaic installations have taken off far more quickly than expected due to cost compressions: McKinsey expected costs to fall to $2.40 per watt by 2030, but they now see $1.60 in 2020, 10 years earlier.

McKinsey in 2007 predicted a rise in wind capacity from 94 gigawatts in 2007 to 800 GW by 2030. Yet by 2014 it had already reached 370 GW, 22% larger than McKinsey’s table predicted would be the case last year.

McKinsey’s latest predictions make for encouraging reading for those following the technology metals. In 2014, electric vehicles accounted for just 1% of U.S. sales and even less internationally. The analysts are now expecting 10% of all cars being electric by 2030 in the 34 member countries of the OECD. (And that does not include China, which is committed to electric automobiles.)

So that is the trend. Which makes for a great deal more cheerful reading that the present stage of the commodity cycle.


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